SHB Exclusive: Four Lending Experts Discuss Student Housing Activity in 2020, Outlook for 2021

The student housing industry is in the midst of proving itself to be pandemic proof. However, the proof isn’t quite 100 percent there yet, prompting lenders to remain somewhat cautious. As the pandemic hit, many lenders — including the two government sponsored agencies who fund most student housing financing — put in place “COVID reserves.” The reserves require a set period of principal and interest payments be placed in escrow to ensure debt coverage through a certain period. While that hasn’t stalled loan production, the requirement — along with a few other conditions — has limited what projects can secure financing. 

Student Housing Business recently spoke with four lending experts in the sector about activity during 2020, and to get a forecast for 2021. SHB spoke with Will Baker, senior managing director of Walker & Dunlop; Tim Bradley, principal and founder of TSB Capital Advisors; Griffin Cotter, senior director of production and sales, and national head of student housing at Freddie Mac; and Ben Roelke, executive vice president, debt and structured finance, with CBRE Capital Markets.

SHB: How would you characterize lenders’ receptiveness to student housing deals across 2020? Have things changed as the year progressed? 

Roelke: When universities shut down their campuses in March 2020, lenders adopted a very ‘risk-off’ mentality towards student housing with the looming uncertainty of how and when college campuses would re-open for in-person learning. Over the summer, we saw positive indicators continue for the sector as many universities began releasing their plans for re-opening in the fall, pre-leasing velocity continued to gain momentum and the majority of student housing residents continued to pay rent. As fall 2020 move-in approached, lenders started coming back to the table. Their receptiveness to student housing came with modified debt terms including provisions like verification of new rental collections prior to closing and requiring up-front ‘COVID reserves’ of nine to 12 months of principal and interest. 

Bradley: The lending environment is all across the board. We have seen banks and life companies start to come back into the student housing space for well-occupied student housing properties in good locations, such as Power 5 schools with strong sponsors, but leverage is in the 50 to 60 percent of value range versus being 60 to 70 percent, even 75 percent pre-COVID. Agencies have been quoting and closing on student housing transactions, but similar to the comment above, mostly with repeat borrowers. Construction lending is another story in today’s market. Banks and debt funds are the primary sources of construction financing and the market has been tough. For the time being, most loans over $50 million — outside of money center banks — need syndication before closing on the financing transaction and relationships are key to source the lead lender. Most banks are financing transactions based on the relationship outside of just lending with the borrower. The bar has been raised for sponsors who qualify for new construction financing in the current environment. The main takeaway is that relationships are the most dominant factor for the lending community in the current market. 

Baker: We are busy with acquisition financing. We have a number of deals set to close. We recently closed the loan on The Lex, a 649-bed student housing property in Lexington, Kentucky, that was purchased by William Fideli Investments. We have a number of other deals lined up that will probably close in January 2021. As a whole, 2020 will be a lighter year than 2019 for obvious reasons. 

Cotter: Freddie Mac has been and remains receptive to student deals that are structured appropriately with experienced student borrowers. We adjusted our credit parameters and implemented a debt service reserve
requirement during 2020 to account for changing credit risks.

SHB: Are Fannie Mae and Freddie Mac still the predominant lenders for student deals? 

Roelke: Fannie Mae and Freddie Mac continue to be the predominant lender for student housing. Along with the announcement for the new GSE caps, Freddie Mac indicated that 1 percent of their overall volume this year is student housing. That would equate to about $800 million. They also stated that they would likely do the same 1 percent next year. Fannie has not released specific guidance on the sector, but we have seen them continue to be smart and aggressive about which deals they pursue. 

Baker: Fannie and Freddie are still active as long the deal conforms to their COVID rules, which are large campuses with at least 15,000 students enrolled. The best case will be 65 percent leverage with a 1.35-times debt service coverage ratio. They prefer established customers — those who already have a loan. They are definitely being selective on borrowers and the market. They also require nine to 12 months of principal and interest escrows. The way that works is that if you lease up well for fall 2021, you will receive your money back, but you have to prove out that you are performing as underwritten. If you want an agency loan, those terms are pretty non-negotiable. We have also seen some non-agency lenders also require debt service escrows that are COVID-related. 

Cotter: Freddie Mac has been a steady source of liquidity in the student market throughout the year and we will continue to be a student housing lender throughout 2021. Due to the pandemic, there was less competition than anticipated at the outset of 2020. We expect competition to increase on student deals as other lenders return to the space.

Baker: If you have a student housing project in a major MSA, for example at Georgia Tech or Georgia State in Atlanta, your options can widen to include major insurance company lenders. There are also some banks who will do permanent financing on student housing. 

SHB: Have deal terms changed for student housing?  

Bradley: Yes. On average, maximum leverage is down 5 percent from pre-COVID levels. Agency proceed sizing typically maxes out in the 65 percent loan-to-value (LTV) / 1.35 times  debt service coverage ratio range today, whereas pre-COVID it was possible to get 70 percent LTV / 1.30 times sizing parameters. We’ve seen the same leverage reduction from banks and insurance companies who prefer to stay in the 55 to 60 percent LTV range with exceptions for very strong historically performing assets and top-tier sponsors. Pricing is not that much different from pre-COVID levels but perhaps the biggest adjustment in terms post-COVID is the agencies require 12- to 18-month interest reserves for student housing. The impact is net lower proceeds day one, but the reserves are returned to the borrower upon two successful occupancy quarters the next academic year.

Cotter: Due to the pandemic, deal terms for student housing are more conservative than they were last year. Leverage and interest only have become more conservative and debt service reserves were instituted to account for risks presented by the pandemic. I expect deal terms on student housing transactions to remain consistent with where they are now, but we will continue to be flexible and adjust to market forces.

Roelke: Lenders have become more selective about student housing. For example, many have scaled back their maximum LTV/LTC offerings, as well as interest only availability and require up-front debt service reserves. For the highest quality sponsorship with top of market assets, there are still very attractive terms available from the capital markets. 

SHB: Where is private equity fitting in today’s student housing financing environment? We had contradicting reports that some private equity players are out of the market, while we heard others are very active. How do you see them in the market?  

Bradley: As confusing as it sounds, neither statement is inaccurate. There are a number of equity groups on pause for student, mostly foreign investors due to travel restrictions that prevent them from touring acquisition targets. That said, the majority of the domestic institutional equity players are still actively pursuing development and acquisition opportunities and we expect to see an uptick in investments sales closings in the first quarter of 2021. We have seen a lot of the domestic equity continue to invest heavily in development transactions as it gets harder for developments to get done due to capital constraints in the current market. We believe potential deliveries pre-COVID for 2022 versus where we sit today are going to be down 35 percent-plus, with delays due to COVID constraints. Overall, this should help the off-campus market as we expect 2023 to have 25 percent or more delays for developments as well. 

Roelke: Similar to the reaction from the lender community, we have seen some private equity adopt more of a wait-and-see approach to the student housing market while others are diving in and taking advantage of how much more attractive the returns are in student housing versus conventional multifamily right now.

Baker: Private equity is still active. Some of the foreign capital players have had logistical issues, in that they can’t travel to the United States to look at projects, but hopefully that will clear up in 2021. Private equity, in general, is not sitting on the sidelines. 

SHB: How active/hungry are lenders for student deals? Are most lenders after a long-term relationship?

Bradley: Lenders are very interested in the ‘right’ student deals. The ‘right’ deals, in broad terms, are defined as stabilized assets, with experienced student sponsors, in university markets with 25,000-plus students. If one of those characteristics does not apply, there are still lenders interested in lending to student borrowers, but the pricing may reflect the perceived risk profile of the asset. Construction is a different animal — purely relationship based if it’s a bank and priced higher if it’s a debt fund. But both require top tier sponsors to finance new construction. 

SHB: Are there product types or markets that lenders are shying away from right now? If so, why?

Cotter: We are more cautious in markets that feature smaller universities where an enrollment decline or new supply can have an outsized impact. We also pay close attention to markets where we have had or have loans that are underperforming.

SHB: How much student housing do you forecast will have been funded in 2020? How strong is your pipeline for 2021 and beyond? When do you predict activity will pick up?  

Roelke: Our team is on track to fund more than $500 million in student housing for 2020 with the majority of that being post-COVID. We have a lot of momentum for 2021 and are already signing up transactions. We are seeing some signs of increased liquidity from lenders for student and believe that could really grow in 2021 with more collections data, positive vaccine news, etcetera. 

Bradley: At TSB Companies, we’ve closed on total transaction volume of approximately $2.8 billion this year and expect to finish around $4 billion, including construction loans, stabilized term loans, and interim loans, as well as sales, and joint venture partnership consultations. 

SHB: Having nearly finished 2020, did you see any long-term positives emerge for the student housing industry? Conversely, did the pandemic reveal any red flags to you?  

Baker: It’s a little hard to tell what next year is going to look like. I don’t think it’s going to be status quo. I think the terms that we are seeing right now — 65 percent leverage, top markets, repeat customers — are going to stay the terms at least until the first half of next year. I don’t think the COVID escrow is going anywhere either. The good news is that debt is very cheap right now. That is what is keeping deal flow busy. Sponsors realize that we are at historically low interest rates right now so if you are looking at acquiring a project, you may be able to place a little more equity to handle the 65 percent leverage because of the low interest rate. With 65 percent leverage, you can usually get at least five years of interest-only installments. If things get back to normal in the fall, we will start seeing the kind of better terms from lenders that we are more accustomed to seeing.

Bradley: There are a lot of positives for the student housing industry to take away from this incredibly challenging year. For one, while closing volume is understandably down, the top 20 operators of student housing properties did an incredible job maintaining occupancy and collections while providing excellent service and safe accommodations to university students across the country. The debt markets will be one of the key indicators of the number of developments able to be financed and properties able to be acquired in 2021 and 2022. Many observers assumed the student housing industry would be devastated by pandemic-forced school closures and campus clusters. Instead, thanks in large part to the rational and institutional nature of our major operators, investors, and lenders, the industry has proven once again that it is recession-resistant. There will be other challenges our industry faces in the years to come, but it’s difficult to imagine a more challenging singular event than the one we experienced this year with COVID. The student housing sector has seen minimal dislocation and is poised for a big year in 2021. 

Roelke: While 2020 was tough on everyone, it was good news overall for the student housing industry. At the beginning of the lockdown in March there was a lot of uncertainty surrounding student housing and the future of higher education as a whole. However, as the pandemic wore on, nationwide collections were much stronger than expected. And we saw students return to their college towns for fall 2020, and are seeing a big push back on virtual instruction. The same fundamentals that carried the sector through the Great Recession are now proving that they can carry it through this crisis. 

— Randall Shearin

This article was originally published in the November/December 2020 issue of Student Housing Business magazine. To subscribe, please click here